March 20, 2020
I wasn’t planning to write about the current market fall.
Especially since I already published a hefty article on the topic when the market was falling back in 2018.
If you missed that one, here it is: “Long Term Investing & Shrugging Off Sharemarket Falls”
But it seems the coronavirus is going to be with us for some time. Therefore, it will continue to affect what happens in markets and the economy.
While a lot is still unclear, here are my thoughts on the current situation and how to approach it as a long term investor.
Well… it’s been an interesting few weeks for sharemarket investors to say the least!
After a calm and serene few years of gains, we’re now experiencing some huge volatility. Think of a peaceful lake turning into a rough and stormy sea.
Depending on your age, you’ve seen something similar before (GFC), or it feels completely crazy. Almost everyone in the FI community hasn’t invested through a period like this, myself included.
Despite a few wobbles in 2011 and 2018, the markets have been on a reasonably steady upward march since 2009 or so. But things are getting real now.
As I type this on Thursday March 19, both the US and Aussie sharemarkets are down about 33%, since the 20th of Feb. Not only that, but daily moves are no longer in the 1-2% range. More like 5-10%!
If you’re a complete newbie to the sharemarket and are wondering why on earth someone would choose shares over property, or just don’t understand how the sharemarket works, this post is for you.
From what I’ve read, this is the fastest bear market on record. So it’s a little unusual. But a global pandemic will do that!
This might sound strange, but if I had to choose, I prefer this rapid decline in prices compared to a slow grind lower over a couple of years.
That’s not to say it’s over. Who could say that?! But a fast adjustment is probably easier to stomach than a sliding market which lasts years – death by a thousands cuts style.
If any readers have invested through bear markets before, I’d love to hear your opinion on this.
First, we need to do our best to keep calm. Breathe. Really!
It might feel like it now, but the world is not going to end. Is coronavirus a terrible health crisis causing death and pain around the globe? Yes, absolutely.
Are markets and economies and livelihoods being disrupted and damaged by this? Yes, no question.
But it’s important to remember, this is a short term issue. As everyone works together, this virus will eventually be under control and then recede at some point.
It may be with us for a while yet, but we will pass through the other side.
In terms of the economy, things are starting to look bleak. As we shut down more gatherings, events, restaurants and potentially schools, the incomes of many people will be affected.
My hope is that most people have enough savings and adaptability to see them through. But given my readership as a percentage of the population is relatively low, I’m not sure that’s the case 😉
Ultimately, I don’t know what’s going to happen. But things could get painful for lots of people and have nasty knock-on effects across the economy. Hotels, tourism, cafes, shops, real estate, pretty much everything could take a hit.
I’m not one to be alarmist, but that wouldn’t be good and it’s simply not clear where we’ll end up (hence the market freaking out).
On a more positive note, my readers and those in the FI community are perhaps the best positioned people in the whole population to deal with this.
Thanks to strong savings habits, investment portfolios and often an unusual ability to see personal finance and thriving in any situation as more of a game than an inconvenience.
So it’s time to be thankful for the relatively fortunate position we’ve built for ourselves.
And who knows, after all this is over, maybe this will be the wake-up call for those who ignore their finances when times are good? Maybe they’ll see the light, build some savings and start paving their own path to freedom.
Obviously, none of this is ideal. Some of you will be affected by the hit to the economy. But for those with a bit of wealth and savings behind them, it’s unlikely to spell disaster.
The answer is, most likely. Some respected economists like Bill Evans from Westpac have stated the economy is likely to have two consecutive quarters of negative growth this year, in the first and second quarter.
That’s why you’ve likely heard the Reserve Bank (RBA) has cut interest rates again and, along with the Government, have announced a stimulus package. Their aim is to help the economy muddle through this strange lockdown situation, while we get the virus under control.
It’s expected that as the virus passes, the economy will pick up once again, thanks to extremely low interest rates, a low Aussie dollar, and whatever other stimulus measures are deemed necessary.
Even though it’s forecast EVERY SINGLE YEAR, we haven’t had a recession for roughly 30 years. So, in some ways, I think a short recession might allow us to shut up about it and move on. But I’m not holding my breath on that one!
We currently hold the world record for the longest period of consecutive economic growth. Even if we can’t keep it going, we should be pretty pleased about that!
Besides, it’s not the end of the world to have a small dip before continuing the long term trend of economic growth.
For most people, the virus isn’t that scary. The real concern is we don’t want the wrong people to get it. Like those with existing health issues and the elderly.
So locking things down for a while does seem to make sense. This article is a very good read on the topic and how we can all play a helpful part.
Now let’s talk about how this affects our investments…
Given the outlook for travel, tourism and hospitality right now, it’s totally possible that many businesses won’t survive this. And there will be snowball effects to almost every type of industry due to the shutdown.
Some companies will be forced to lay off workers or close down completely. Less cash circulating in the economy and lower confidence will lead to more of the same.
You might have noticed certain businesses are flourishing in these conditions. Supermarkets! And if the moronic behaviour in the store keeps up, security personnel will also do well.
But for most of us, the risk of having dying companies in our portfolio isn’t a big deal. In most cases, you wouldn’t even notice, if you’ve invested in what I’d call permanent holdings. Examples of this being index funds or widely diversified LICs.
From an investment standpoint, I take comfort topping up these holdings, knowing they aren’t going anywhere and a few bad companies inside these funds will make very little difference to the long term outcome.
Contrast this with buying individual stocks, where there are more unknowns, less diversification, and the decision-making rests with you!
That can add stress to an already stressful market decline. And for some people, that can prove too much.
For those who look at different companies: with prices down so much, do some of them just look irresistible right now?
I used to play this game too. I don’t anymore. It seems to be natural for investors early on to start seeing opportunities everywhere and get a little overenthusiastic.
But we’re not the only ones watching. There are thousands of analysts studying the same companies that we’re casually glancing at. Not always, but sometimes things are cheap for a reason.
For me, buying individual companies was hit-and-miss. And I ended up resenting the time spent following and thinking about them. So I now hold only diversified funds (index and LICs), and much prefer it this way.
Maybe some stocks are cheap. Maybe they have fallen too much. That’s almost certain to be true. But I’ll leave that for people smarter than me to figure out!
If some stocks are underpriced or great value, I’d hope the managers of my LICs are buying some right now. So there’s really no need for me to go out and do the same. In any case, I keep it simple and don’t think about that stuff anymore.
What’s going to happen here? Nobody really knows at this stage.
Even some central banks (like the US) have now stopped economic forecasts, because the short-term is too uncertain right now. Everything depends on how far the virus spreads.
It does seem likely that earnings and dividends will take a hit. But overall, I’m not sure it will be as great as the 35% decline in share prices we’ve seen so far.
We won’t find out for at least a few months, so we’ll see.
Then… so be it. I’m not sure about you, but I’m still buying shares. Why wouldn’t I?
For those thinking you can buy at the bottom, or even know it’s the bottom, you’re dreaming! Almost by definition, only one person can buy at the bottom.
By the time the “dust has settled” on the virus and economic issues, the market will have already moved up. So to paraphrase Peter Thornhill, “hold your nose and keep buying.”
Yes, it feels nicer to buy when the market is calm and rising. But the most profitable times to invest are typically the scariest. The problem is, we can only see this after the fact.
As it turns out, the most volatile periods are also a decent indicator of good future returns. Check out this post.
Peter Lynch, a famous fund manager, is fond of saying, “In the stock market, the most important organ is not the brain. It’s the stomach.”
And times like this is exactly why he says that. You need to be able to hold on during tough periods to get attractive long term returns from the market.
Great investors like Warren Buffett and the like don’t know when the market will turn around, or how bad it will get. They simply try to buy more as prices get lower.
We should do the same. And as we do, we’ll slowly build up that cast iron stomach that’s needed to be a stoic and successful long term investor.
Great insight. So does almost everybody with a pulse. Unfortunately, that gives us zero insight into the best time to buy shares.
The market doesn’t line up with what’s happening in the economy. That’s because markets are forward-looking. So right now, prices are down because of the anticipation of lower profits in the next year or so.
By the time things are looking okay and the economy is starting to recover, the market has already moved up because it’s looking ahead to the improved profits in the future.
You might be able to see and feel when things are getting better. But you can’t know when the mood will change in the market.
Seriously! It achieves nothing. Right now, this will bring you only negative feelings.
Research shows we experience the pain of loss much more than the joy of gain. So if the market is down 5% one day and up 5% the next day, that does NOT even out from an emotional perspective. Not even close.
So keep your emotions in check by simply avoiding the temptation to add up the current market value of your portfolio. All pain, no benefit. Don’t do it to yourself.
Hopefully you have a plan to buy shares every month or so. Continue on as planned. Don’t let the market or other short-term minded people convince you otherwise.
The truth is nobody knows what’s going to happen in the next few months. But we do know that business is not going to disappear and that as of right now, we’re getting 30% off the permanent value of these companies.
Invest a little more if you can afford to. Yes, prices might fall more. But in my view, now is a good time to try and find some extra spare cash to buy shares while they’re on sale.
Because as an owner of shares, that’s exactly what you are.
Does your local cafe care what other people think their cafe is worth? If a customer came in every day and gave them an offer to buy the cafe that was lower and lower, they’d probably get pretty annoyed.
All the owner cares about is how much long term cashflow the cafe is going to produce. If they have to shut down for a few weeks, or even a couple of months, does that really affect the cafe’s income over the next 50 years?
Sure, it’ll make much less in the short term. But if they can see past the rough patch, their earnings will recover and the long term future will continue as before.
So we should think about our investments in the same way. Don’t focus on the next 12 months. Think about the lifetime profits of the big basket of companies that makes up the Aussie and global markets.
Given what’s happening in the market, chat forums are lighting up in a frenzy of activity.
Now, don’t get me wrong. Forums are a great place to connect with like-minded people. But in times like this, they can be problematic – even damaging. Here’s why…
There are too many forecasts. Too many armchair experts. Too much chatter and emotion-driven behaviour. And too many short-term speculators.
It seems like everyone is freaking out, because the calm, long term investors are mostly avoiding these places. Why? So they can think clearly, by themselves, without the noise and useless opinions.
So turn down the chatter and take a break. Go for a walk. Play with your kids. Just do anything else for a while. And continue on with your plan.
My plan? To continue increasing my ownership in a wide group of businesses and enjoy the lifetime dividend streams they send my way.
I know I mention this a lot. But it’s important. When times get tough, it becomes extremely obvious which spending is truly optional and which is essential.
And it turns out, aside from groceries and housing, most of it is optional. So it’s a pretty good time to trim some fat in your spending.
You can use this cash to increase your portfolio, or add to your savings in case of job interruption. Trimming your lifestyle might actually be quite easy as things could be shutting down for a little while.
This also reduces the risk of running into financial trouble if the slowdown affects you negatively.
Try to avoid large crowds and busy places. Most people and workplaces are now taking this pretty seriously.
I’ve been joking with Mrs SMA that as an introvert I’m already a pro at self-isolation. In fact, it’s my default setting most of the time, as I love to live a simple, quiet life. So fortunately, I’m well equipped for these conditions!
Could your job be affected? Do you have enough cash to cover forced leave or job loss for a few months?
As I said, it seems likely there will be flow-on effects so if we enter ‘shutdown’ mode, most people will be affected.
For those in the early or middle stages of their FI journey: I know it’s scary, but keep building your portfolio.
For those towards the end or already retired: Make sure your backup plans are in place and use them if need be.
And for everyone: Make sure your personal finances are in tip top condition. Know where all your money goes and be prepared to adapt to whatever happens.
Fortunately, those in the FI community are famous for taking 100% responsibility for their financial situation, so as a group we should come out the other side stronger than before.
I know we all have limited funds. But please use your savings in a rational way. Use it to STOCK UP ON SHARES, NOT TOILET PAPER!
For those seeking Financial Independence, a market decline is a blessing in disguise. It allows you to build your portfolio at much lower prices.
If you do lots of your buying while prices are low, when the market recovers you’ll be in a much richer position than you’d otherwise be.
For dividend-focused investors, the income streams we’re buying are now cheaper. Dividends might fall in the short-term, but they too will recover and grow once more. In the meantime, we’re getting more than 30% off the value of these lifetime streams of cashflow.
We all want a large retirement-sustaining portfolio which spits out enough cash to live on. But you don’t get there by watching and waiting (and definitely not by freaking out and selling).
You get there by investing as much as you can, regularly, over a long period of time. That includes during times like this. Especially, during times like this.